Dynamic term structure models: The best way to enforce the zero lower bound

Martin M. Andreasen () and Andrew Meldrum
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Martin M. Andreasen: Aarhus University and CREATES, Postal: Aarhus University and CREATES, Department of Economics and Business, Fuglesangs Alle 4, 8210 Aarhus V

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper studies whether dynamic term structure models for US nominal bond yields should enforce the zero lower bound by a quadratic policy rate or a shadow rate specification. We address the question by estimating quadratic term structure models (QTSMs) and shadow rate models with at most four pricing factors using the sequential regression approach. Our findings suggest that the two models largely provide the same in-sample .t, but loadings from ordinary and risk-adjusted Campbell-Shiller regressions are generally best matched by the shadow rate models. We also find that the shadow rate models perform better than the QTSMs when forecasting bond yields out of sample.

Keywords: Bias-adjustment; Forecasting study; Quadratic term structure models; Shadow rate models; The sequential regression approach (search for similar items in EconPapers)
JEL-codes: C10 C50 G12 (search for similar items in EconPapers)
Pages: 67
Date: 2014-11-26
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (13)

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